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The basics:
Any profit sharing or stock bonus plan that meets certain participation
requirements of IRC Sec. 401(k) can be a cash or deferred plan. An employee
can agree to a salary reduction or to defer a bonus which he or she has
coming. Tax-exempt entities may also adopt a 401(k) plan.
How it Works:
● Employee has the option of taking cash or
having it paid to the trust for retirement. This is equivalent to an
employee tax-deductible contribution. However, employee deferrals are
subject to FICA and FUTA payroll taxes, with applicable payments from both
the employer and employee.
● Any additional employer contributions are
tax deductible.
● Employer contributions, if any, are not
taxed currently to the employee.
● Earnings accumulate income tax-deferred.
● Distributions are generally taxed as
ordinary income. Distributions may be eligible for 10-year income
averaging1, or, at retirement from the current employer, rolled over to a
Traditional or a Roth IRA2 or to another employer plan if that plan will
accept such a rollover. Beginning in 2007, federal law allows retirement
distributions to employees who are at least age 62 even if they have not
separated from employment at the time distributions begin.
For more information:
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The basics:
These plans are different from traditional money purchase pension and
profit sharing plans in that they define different participant groups who will
receive different levels of employer contributions. They must comply with very
detailed and complicated regulations under IRC Sec. 401(a)(4). They are
typically called either cross-tested, tiered or super-integrated money
purchase pension or profit sharing plans.
How it Works:
● Employer contributions are tax deductible.
● Contributions are not taxed currently to the
employee.
● Earnings accumulate income tax-deferred.
● Distributions are generally taxed as
ordinary income. Distributions may be eligible for 10-year income
averaging1, or, at retirement from the current employer, rolled over to a
Traditional or a Roth IRA2 or to another employer plan if that plan will
accept such a rollover. Beginning in 2007, federal law allows retirement
distributions to employees who are at least age 62 even if they have not
separated from employment at the time distributions begin.
For more information:
Click here for the PDF
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Introduction:
In general, the Internal Revenue Code (IRC) requires all qualified employer
plans to meet certain nondiscrimination requirements. Employer plans
established under IRC Sec. 401(k) are subject to one or two additional tests.
The first test, applicable to employee deferrals only, is known as the “actual
deferral percentage” (ADP) test. The second possible test is the “actual
contribution percentage” (ACP) test and is applied only when there are
employer-matching contributions.
The Small Business Job Protection Act of 1996 provided 401(k) plans with
alternative, simplified methods of meeting these additional nondiscrimination
requirements. 401(k) plans that adopt one of these alternative methods are
referred to as “safe harbor” 401(k) plans. A safe harbor plan is very similar
to a non-safe harbor plan. The primary difference is how a safe harbor plan
satisfies the IRC’s additional nondiscrimination requirements.
Beginning in 2008, the Pension Protection Act of 2006 added a separate safe
harbor 401(k) plan for plans that use automatic enrollment.
For more information:
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the PDF
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The basics:
Employer contributes an actuarially determined amount sufficient to pay
each participant a fixed or defined benefit at his or her retirement.
How it Works:
● Employer contributes an actuarially
determined amount each year to the plan.
● Employer contributions are tax deductible.
● Contributions are not taxed currently to the
employee.
● Earnings accumulate income tax-deferred.
● Distributions are generally taxed as
ordinary income. Distributions may be eligible for 10-year income
averaging1, or, at retirement from the current employer, rolled over to a
Traditional or a Roth IRA2 or to another employer plan if that plan will
accept such a rollover. Beginning in 2007, federal law allows retirement
distributions to employees who are at least age 62 even if they have not
separated from employment at the time distributions begin.
For more information:
Click here for the PDF
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The basics:
Employer contributions to the plan need not be a specific percentage and
they need not be made every year, as long as they are “recurring and
substantial.”1 Profits are not required in order to make a contribution.
How it Works:
● Employer contributions are tax deductible.
● Contributions are not taxed currently to the
employee.
● Earnings accumulate income tax-deferred.
● Distributions are generally taxed as
ordinary income. Distributions may be eligible for 10-year income
averaging2, or, at retirement from the current employer, rolled over to a
Traditional or a Roth IRA3, or to another employer plan if that plan will
accept such a rollover. Beginning in 2007, federal law allows retirement
distributions to employees who are at least age 62 even if they have not
separated from employment at the time distributions begin.
For more information:
Click here for the PDF
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Most transactions between a qualified plan and its participants are
prohibited transactions. One exception to the prohibited transaction rules
concerns the granting of a loan to a plan participant.
For more information:
Click here for the PDF
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